Proceedings of the Standing Senate Committee on 
Foreign Affairs and International Trade

OTTAWA, Tuesday, November 3, 2009

The Standing Senate Committee on Foreign Affairs and International Trade met this day at 5:46 p.m. to study the rise of China, India and Russia in the global economy and the implications for Canadian policy.

[ English ]

Senator Consiglio Di Nino (Chair) in the chair.

The Chair: Good afternoon, and welcome to the Standing Senate Committee on Foreign Affairs and International Trade. The committee is continuing its study on the rise of China, India and Russia in the global economy and the implications for Canadian policy.

Appearing before the committee today is Professor Fen Hampson, Director of the Norman Paterson School of International Affairs at Carleton University in Ottawa. Mr. Hampson graduated from the University of Toronto and was awarded the John Moss Scholarship for Outstanding Leadership on graduation. He also holds a Masters of Science in Economics from the London School of Economics, and MA and a PhD degrees from Harvard University. I hope they pay you well, Mr. Hampson. He is also the recipient of various awards and honours.

Mr. Hampson, please proceed.

Fen Hampson, Director, Norman Paterson School of International Affairs, Carleton University: Thank you, Mr. Chair. I appreciate the opportunity to share my views with members of the committee. I have circulated a text in advance and I would appreciate it if the clerk of the committee would include the complete text in the appendix to my presentation. I will not go through the entire text.

I will offer a few brief introductory remarks about the economic dimension of our relationship with these three countries. At the end of my remarks, I will make more general comments about the broader political and diplomatic dimension of our relationship with these three countries.

At the outset, I must say that it is a mistake to lump these three countries together in one category. It is usual to refer to them as part of the Brazil, Russia, India and China countries, BRIC, and in this case the B is missing. I say that because these countries are different in terms of their economic size, global impact, influence and their potential implications for Canada. China is clearly the behemoth of the group. Its $4 trillion-plus economy is already the world's second or third largest, depending on how we do the math. I say that because the renminbi continues to be undervalued by some estimates anywhere from 20 per cent to 40 per cent, which means China's economy is even bigger than its nominal GDP would suggest.

For many years, the Chinese artificially manipulated their exchange rate to run up huge trade and capital account surpluses. To avoid inflation, the Bank of China's policy, until about 18 months ago, was to issue government bonds and take back the extra money in circulation by reducing the net increase in their money supply. With the onset of the economic crisis, however, China was forced to stop issuing debt. As a consequence, its money supply went through the roof with its rapidly accumulating exchange reserves. They were worried and continue to be worried about inflation in the United States, which will diminish the value of their U.S. Treasury and bond holdings. Currently, China is in the process of trying to shed itself of some of its U.S. dollars. That is one of the reasons that they want a new world currency, which they believe would be more stable than the U.S. dollar. It is also the reason why China is looking to expand its influence and role in the world's key financial and economic institutions. In addition, it is the reason China has embarked on a major global expansion through what is now a multi-trillion-dollar sovereign wealth fund to buy foreign assets while also meeting its demand for raw materials.

China, as we all know, is a growing military power. It has a blue water navy and it now has long- and medium-range nuclear missile capabilities. However, it is important to recognize that its defence budget is still about one sixth that of the United States.

India is the world's twelfth largest economy, depending on how we do the math, but it is the second fastest in terms of its economic growth. Its impressive rates of economic growth in recent years have been driven by the liberalization of their economy. We have also seen that exports of goods and services, as a percentage of gross domestic product, in recent years have doubled from what they were in the 1990s. The precentage is now somewhere around 20 per cent, or slightly more, of GDP.

India is not one of the world's great trading states, at least not yet. However, it has one of the fastest and the largest growing middle classes in the developing world. Some estimates put the number at around 50 million, and projections suggest that by 2025 that number will go through the roof. Again, the estimate is anywhere from 400 million to 600 million people.

China and India, as we all know, have emerged from the recent economic crisis with strong growth rates. The same cannot be said about Russia, which was hard hit by the drop in world commodity prices, especially oil and gas, and the sudden reversal of its capital flows. Its GDP, which is slightly less than $2 trillion — at least it was in 2008 — fell by more than 10 per cent in the first half of this year.

Russia is clearly not in the same league as China or India. However, it is one of the world's biggest energy producers, and its energy presence obviously is felt most in Europe, Ukraine and its neighbours who rely on its energy exports.

As we all know, Russia is still a nuclear superpower, and we have also seen it flexing its muscles by sending warships into international waters and dispatching long-range bombers on reconnaissance flights in the Arctic, but many see this flexing as more bluster than anything else.

The second point I want to make is that although Canada's most important trading and investment partner continues to be the United States, these three countries are of growing importance to us. That being said, China is clearly the most important and the most significant in terms of trade and investment. China is now our third most important trading partner after the European Union.

I have provided figures, which you will see at the end of my text. Figure 1 indicates that our exports to all three countries have risen steadily since the 1990s. The same is true of our imports, which are listed in figure 3.

Foreign direct investment from these countries, which you can see in figure 5, is also on the increase. Most of our investment to China goes through Hong Kong. That should come as no surprise, because there are some 200,000 Canadian citizens living in Hong Kong. Hong Kong is a gateway for investment into China. Chinese and Hong Kong investment is also on the upswing in Canada.

The reality is that our trade and investment relations are deepening with all three countries. Again, China is clearly the big player. If you look at those steadily rising curves, it is interesting that they do not bear any relationship to our changing political relationships, which in China have gone up and down in recent years. The numbers point to the fact that trade does not necessarily follow the Canadian flag, whether it is fluttering in the breeze or lying dormant.

There are key obstacles to economic growth when it comes to conducting business in these countries, and my paper discusses what some of those obstacles are. There are many legal impediments and hidden obstacles that continue to hamper access to the Chinese market, particularly in areas such as publishing, telecommunications, oil exploration, marketing, pharmaceuticals, banking, investment, insurance and so forth, which are fiercely protected or simply off limits to foreigners. Having said that, clearly the policy challenge is to work with other countries through the World Trade Organization, WTO, of which China is a member, to secure greater access to the Chinese market.

In the case of India, the problem is slightly different. There are some aspects of the same problems — corruption, bureaucracy and red tape — which all tend to inhibit business.

My third point is that the importance of these countries, especially China, to Canada goes well beyond direct bilateral trade and commercial ties. In the case of China, its management of its bilateral relationship with the United States is clearly important to us. China, like Canada, faces the threat of U.S. protectionism, and that clearly will affect China's economic growth if it gains any steam.

The financial dimensions and management of this relationship also matter to us. China, the world's biggest creditor, is floating the world's biggest debtor, the U.S. The reality is that China cannot keep accumulating U.S. dollars indefinitely. The real question is: How will this game end? Will it end with a bang, that is to say, a blow-up, or a gentle move to stabilization? Either way, it will affect the value of the U.S. dollar, interest rates, the level of inflation in the United States and ultimately our own economic fortunes. That is the reality of the China-U.S. relationship, and it matters a whole lot to us how those two scorpions in a bottle, if you want to put it in those terms, manage that financial relationship.

Given the important role that China and emerging powers are playing in global financial economic recovery, I think it is also fair to say that Canada must support an expanded role for these countries in the International Monetary Fund, IMF, and global economic institutions that is commensurate with their growing power and economic wealth. Having said that, I think we should be under no illusion that it will be easy as these countries come to play a greater role. They have different norms, sensitivities and affiliations, and these things will affect the operational culture, performance and management of the IMF and other global institutions.

Fourth point, all these countries — and I would add to the list, in this case, Brazil, and I gather you have heard this from some of your other witnesses — possess large state-owned or semi-private companies that operate in the resource and commodity sectors. These companies are playing an increasingly important role in the global economy as they seek new markets and outlets for investment. The problem is that with growing levels of market concentration, they will be in a position, and some are already in a position, to manipulate both the price and supply of key commodities.

Again, China is by far and away the biggest economic player. It is using its sovereign wealth to acquire a growing stake in global commodity markets in Brazil, Russia, Africa, Asia and the Middle East. The Chinese government is extending highly favourable loans to major Chinese corporations to make these lucrative overseas purchases.

India is also becoming a player. Essar Steel bought Canada's Algoma Steel some years ago. Russia's two giant energy companies Gazprom and Lukoil are pursuing a range of joint ventures across Central and Eastern Europe. They are now moving into south-eastern Europe with the South Stream natural gas pipeline.

As these companies make acquisitions in Canada and flex their oligopolistic market power, their restrictive trade practices will affect the Canadian economy. We have seen examples of that impact recently. I know Brazil is not one of the three countries, but it is an important example. Their mining giant Companhia Vale do Rio Doce bought Inco and has used its market position to control prices, including shuttering production at Canadian operations with falling global demand. This real issue will be with us for a while.

Fifth, as we engage and continue to engage with China, India and Russia, this engagement should be on our terms with policies that are calibrated to our own national interests. We will want to ensure that future investments are in our national interest. We went through a national debate on foreign direct investment, FDI, approximately 30 years ago. We came to the conclusion that foreign investment is a good thing for the Canadian economy. Our commitment at the time was driven by the recognition that having an open market for foreign investors operating in similar legal and regulatory jurisdictions to ours is a good thing.

Having said that, we must recognize that China — with its own legal, regulatory and political system — is still developing. There are stunning examples of the lengths to which the Chinese are willing to go to play by a different set of rules. In iron ore price negotiations with the Australian firm Rio Tinto, China did not like the price. What was their response? They threw four senior executives of the Australian company involved in those negotiations in jail, where they still are. There are many other examples but I will not bore you with them.

There are also problems with intellectual property rights, subsidized competition and the law of contracts. Monsanto discovered these problems with the Chinese-owned generic competition to its herbicide business.

We need to be attentive. I do not suggest we go out of our way to sound the tocsin or raise barriers to such investment. However, we may want to look at the experience of other countries much deeper in bed with China. Australia is a good example.

The Canadian government recently introduced amendments to the Investment Canada Act providing for a review of foreign investment acquisitions over a certain threshold that now include a national security test. The problem with that legislation is that it works in almost a binary fashion. The government can accept or reject an investment, but there are no up-front prescriptions as to the parameters. This situation has forced the Minister of Industry to ask for concessions from foreign companies on the fly. Recall the assurances on employment obtained from Vale during the Inco acquisition and Stelco, which was acquired by U.S. Steel. Those promises were vague and largely unenforceable. In some cases, Canadian production was shuttered to manage global supply.

Two implications follow from what I have said. First, the government needs to take a global, not a local, view with emerging global oligopolies on the implications of industrial resource company concentrations when Canadian asset are acquired. Second, and perhaps more important, rules need to be put in place with respect to acquisitions by state- sponsored enterprises perhaps similar to the Australian model: less than 50 per cent control over assets in the resource sector over a certain size, a minimum number of independent directors, et cetera.

Any new legislation must be specific with respect to guidelines. If they are left open-ended, that will only encourage lobbying, special exemptions and vague promises by those doing the acquiring.

Sixth is a more general point. If we look at the history or trajectory of our diplomatic and political relations with these three countries over the past 30 years, they have been on a roller coaster. I suggest we need to get off that roller coaster.

In the case of China, a love affair in the 1970s with the recognition of China under Prime Minister Trudeau soured following the massacre in Tiananmen Square. Our relations warmed under Prime Minister Chrétien, but then cooled during the first minority government of Prime Minister Stephen Harper. They are now on the mend as we anticipate the Prime Minister's visit to China.

The same is true with India. We had a love affair in the 1950s when India was the largest partner in our development assistance under the Colombo Plan. Relations soured following the "Smiling Buddha" nuclear test in 1974 as you may recall. All bilateral nuclear ties were severed in 1976 and the relationship went into a tailspin. In the 1990s, we rediscovered India under Prime Minister Chrétien with those much-vaunted trade missions. However, India's nuclear test in 1998 set back relations once again. They now seem to be on the upswing with a much anticipated visit by the Prime Minister to both India and China.

The situation is the same with Russia. There were good relations during the era of detente followed by a souring with the Soviet invasion of Afghanistan. Relations obviously improved during the Gorbachev-Yeltsin era. With Putin in his own political ascendency, relations have cooled yet again. As the Arctic Ocean warms, Canada-Russia relations arguably have become much cooler. That situation is unfortunate. Notwithstanding our competing sovereignty changes in the North, we have shared interests. We need to strengthen scientific cooperation and rediscover some of the lustre and vision of Gorbachev's 1989 Murmansk speech that looked to new forms of cooperation in the North.

It is true that there are events over which we have no control that can throw a relationship off course. However, we must get over our Goldilocks affliction, that is, we cannot keep changing our minds in the futile search for a relationship where the temperature is just right.

As our ties with these three countries deepen and grow, I suggest that we need a healthy dose of maturity, prudence and, above all, common sense as we look to the future.

The Chair: Thank you, Mr. Hampson, for a thorough and well-balanced presentation.

Senator Zimmer: The committee has heard about the importance of building partnerships to increase the nation's competitiveness both domestically and internationally. What more can be done to connect Canadian universities, research institutions and science and technology organizations with their Chinese, Indian and Russian counterparts?

Mr. Hampson: That is a good question. A lot more can be done than we are doing right now.

The fact is that we are not doing a great deal. If one looks at the number of students from those countries studying in Canada, the number pales in significance to the number of students studying at Australian and British universities, which are relative benchmarks of comparison. Our provinces, which are responsible for higher education, have had a myopic view towards attracting foreign students to our universities.

When it comes to science and technology, we need to do two things. First, we must start investing in relationships that will allow Canadian universities to form stronger networks with academic institutions in China, India and Russia. Again, if we look at our competitors, we need look no further than the United States, where many American universities have satellite campuses in these countries. Some of our universities are moving in the same direction, but they are late players. They are coming to this game late.

Second, in the case of China, we have some institutions that are playing an important role, such as the Asia-Pacific Foundation, which has an East Asian focus, but in the case of India and Russia, we might benefit from having similar institutions in place. It is not only to promote academic exchanges but also to engage members of the scientific research community who are outside the university environment, for example, medical researchers. We can do much more, but it will take investment because exchanges in this day and age do not come cheaply and they have to be strategic.

Senator Zimmer: It is almost subconscious. It is almost as if they are ostracized, rather than these young people from these countries and universities becoming ambassadors for our country when they go back. That opportunity is totally lost.

How can Canada do a better job of using Chinese and Indians in this country to boost bilateral commercial links?

Mr. Hampson: We tend to assume that diasporas are unified communities when they tend to be, in some cases, disaggregated. That poses a huge challenge not so much in the case of China but more so in the case of India, where, as we all know, diasporas from South Asia generally have had particular kinds of political agendas. Some of them have not been particularly attractive agendas from a Canadian standpoint, either.

As we have seen, encouraging communities to develop business councils is interesting, and if you look at the relationship with China, it is no accident that a lot of our investment goes to Hong Kong. Approximately 200,000 Canadians live in Hong Kong. That situation clearly promotes those kinds of economic ties. Again, they require strategic focal points, that is, individuals who are willing to take the lead. That does not necessarily mean throwing money at them, but in the case of India and China, we are also seeing that levels of trade and investment are growing. The real challenge is to keep that curve on the upswing.

Senator Zimmer: How can the Canadian government help business develop successful partnerships in China, India and Russia in order to be a player within their particular industries?

Mr. Hampson: At the end of the day, investment opportunities will come from investors themselves who are looking for those opportunities. However, all kinds of barriers to entry are in all these markets. I mentioned in my testimony some of the barriers to doing business in China and India. Some of that opportunity means working with other partners to reduce barriers to trade and working through aggressive diplomacy in the WTO because we cannot do that on our own.

The disincentives to investment are not unique to us. We tend to think it is our special problem. Well, it is not our special problem; others have the same problem. Those disincentives require us to ratchet up our level of international diplomacy with these countries and to work with others to remove trade investment barriers.

Clearly, the government has a role to play in promoting the development of joint business councils and those kinds of activities. I do not say that government does not have a role here, but we should not be under illusions that government can pick winners and losers when it comes to entering into emerging markets. One must let markets play that role themselves.

Senator Zimmer: Thank you for your appearance today, and for your insightful answers.

[ Translation ]

Senator Fortin-Duplessis: It is a real pleasure to listen to you, Mr. Hampson. In a report published in September, the Asia-Pacific Foundation of Canada concluded that Canada has what it takes to attract billions of dollars of investment from Chinese companies. We know that Chinese companies are just starting to invest abroad, but the importance of these investments, although still limited, is growing. Over these last few years, Chinese companies have endeavoured to invest in the Canadian resource sector, particularly in the mining and energy sector, in the hope of securing a supply of oil and metals essential to their growing economy.

Do you know how badly the recession has impeded the Chinese investment plans?

[ English ]

Mr. Hampson: The recession, paradoxically, as I indicated in my remarks, has been a boon to the capacities of China's sovereign wealth funds. China is now faced with the situation wherein it wants to shed itself of a depreciating asset, namely, the U.S. dollar, and it wants to acquire real assets. I am being somewhat simplistic here, but sometimes a simplistic answer captures what is clearly happening. Up to now, it is fair to say that China has been sensitive to the fact that we are right next door to the U.S. and that U.S. investors play an important role in our resource sector. China has been somewhat wary about being too aggressive in that market, in part, because when they tried to take over some American energy companies, they were burned badly by the backlash they received from the U.S. Congress, which prohibited those investments.

The powers of mutual attraction are growing. China, like any other investor in the resource sector, is looking for secure and stable sources of supply. In that sense, Canada is enormously attractive. We have a problem shipping our oil to China because we do not have a pipeline across the Rockies, but that is not an insurmountable problem if we want to fix it. Likely, we will not fix it as long as we continue to export oil to the United States, which economically makes sense. However, some U.S. environmental groups want to shut out Canadian oil sands exports to the U.S. but I do not suggest they necessarily will succeed. About 60 per cent of the 2.4 million barrels of oil and oil products that we export to the United States daily comes from the oil sands. As we see a continued "thickening" of the border, we will look for other markets; there is no question about it. We are in the process of starting free trade negotiations with the European Union, which is our second most important trading partner after the U.S. If we continue to see what I would call anemic recovery in the U.S., there will be powerful incentives on both sides of the Pacific to ratchet up that relationship, which is for the good.

I do not suggest that developing stronger ties with China is a bad thing. When it comes to investment in the resource sector, which is the mainstay of the Canadian economy, something that will not change in the near future, we want to be cautious about the nature of those investments, and ensure that they are on terms that are good for Canada.

[ Translation ]

Senator Fortin-Duplessis: In part 5 of your remarks, you say that Canada — and it is Minister Stockwell Day, I suppose — has brought about certain changes to the investment rules. Can you tell us what are the main barriers to investing in Canada?

[ English ]

Mr. Hampson: There are not huge barriers to investment in Canada, senator. There is a national security test that remains somewhat vaguely defined as a result of amendments introduced to the Investment Canada Act by the current government. As I indicated, there is a problem with the decision rule in that proposed legislation. It is either yea or nay. We need to be much clearer about what we want to see from foreign investors. I realize there are enormous sensitivities and a legacy that will make even some members of this committee wince, but I stress that the situation is different from what it was in the 1970s. We are looking at a huge player moving into the resource sector. If the history or the recent legacy of how China has been playing in Africa and other parts of the world is any indication, we need to look at future investment with our eyes open. Perhaps we should look at what the Australians are doing. The model is not perfect and they have had problems, but they have also had problems with the way in which they have applied their laws. There has been criticism from Australian companies keen to be bought and to make a sale to Chinese investors. However, the level of Australian integration with China currently is much deeper than ours is. We should look at that model because Australia is in the commodity export business and the resource extraction business. This committee should consider looking at the model.

At the end of the day, you might conclude that model is not for us, and we need a special made-in-Canada approach. Currently, we have a blunt instrument. We can be smarter about investment. Chinese companies have adapted to Australian legislation and they know what the rules are. The model is not perfect but at least they know what the game is. I suggest that we still do not know what the game is.

[ Translation ]

Senator Fortin-Duplessis: Do you think that when the Chinese choose to invest in Canada, it's in the hope of entering the NAFTA market we have with the United States?

[ English ]

Mr. Hampson: In some ways, China is here already in a way that is bigger than we recognize through global value chains. Chinese companies are playing a key role directly or indirectly as manufacturers of subcomponents for automobiles or other manufactured goods on this side of the Pacific. Clearly, the North American Free Trade Agreement, NAFTA, is beneficial to any foreign investor, not only China, who is trying to enter the North American market. Huge barriers at the border serve what I would call security nontariff barriers to trade, which inhibit investment in Canada. It does not matter where that investment comes from.

China has been investing in our resource sector, which is of obvious interest to them in terms of their domestic consumption.

Senator Grafstein: I do not think that all senators know about the distinguished work that Mr. Hampson has led on the Canada-U.S. front. Many of us who have been involved in Canada-U.S. discussions look at his work at the Norman Paterson School of International Affairs with great applause. He has supported a great deal of the work that we have done. Recently, I was able to participate in one of their conferences on the Canada-U.S border, which remains a terrific problem. It was one of the best conferences we have attended. I also commend him for a fantastic article that he and our friend Derek Burney wrote for the National Post in February 2009 on a four-point plan to save free trade with the U.S., which is a big problem. I believe that Mr. Hampson and I are both Manchester Liberals — free traders.

Mr. Hampson, you and I share, as Henry Kissinger would say, oscillation and resonation. We are oscillating between our poles of philosophy. As free traders, we want Canada to be a free trader with any country in the world. On the other hand, we want to ensure trade is free and fair.

It comes down to two issues with respect to China. The criticism that has been made of China, and the key to its success, has been its manipulation by observers of its currency. Canadians are being unfairly treated, as is North America and Europe, because of its ability to control its currency. We do not control our currency. We are post- Keynesians in that sense. What do you say about that, and what can we do about that because it continues today and it beggars Canadian workers?

Mr. Hampson: Senator, first, thank you for your exceedingly generous remarks about the Carleton University Canada-U.S. Project. I also want to thank you for your wonderful participation in that conference and in the work of that project. As we all know, the relationship does not end with the project, and many challenges still lie ahead.

On the issue of currency, I will make a more general comment that China may be emerging as the world's greatest mercantile state. If you look historically, there have been ages in the past when large companies were backed by their governments. I am thinking of the British East India Company and the Hudson's Bay Company. The 17th and 18th centuries are sometimes called the Age of Mercantilism.

What were the characteristics of the mercantile era? One was countries did not engage in free trade; they engaged in managed trade. They promoted exports as a way to stimulate economic growth. They manipulated currencies. They also used the power of the state to back their oligopolies so that they could go and develop their markets in the world, if you want to put it in those terms.

This is more of a philosophical observation, but I think we are still trying to grapple with what is clearly a mercantilist orientation and philosophy that has been driving China's economic growth. It is not limited only to currency manipulation. The model is an export-driven growth model. It is not a consumption- or investment-driven model; it is an export model, which is also a subsidized export model.

The challenge for Canada is to work with others to bring China into the global system. We cannot do it on our own. We are a small to medium-sized economic player and, frankly, we do not have the brute strength and the push-back of the United States or the European Union. Yes, our industry has not been helped by currency manipulation. Will we be able to solve that problem on a bilateral basis? No; it must be solved multilaterally.

Senator Grafstein: How?

Mr. Hampson: One way, first, is to help China wean itself from its addiction to the U.S. dollar. That means moving in the direction not necessarily of a global currency but to special drawing rights in the IMF, which is a basket of currencies, so that China holds on to something other than U.S. dollars. China wants to move in that direction and that is a terrific source of leverage. Again, it is not our independent source of leverage, but it is a leverage that the U.S. has.

Senator Grafstein: On that narrow point, if we support China's interest in a basket of currencies, or however you put it, will that not beggar Canada? In other words, if the American dollar, of which we are triggered, forged and bonded to, if suddenly the currency we are bonded to goes south, goes off or becomes weaker, does that weakening not, in effect, hurt us directly? We are caught between two courses here.

Mr. Hampson: Yes, the fact is the U.S. dollar will have to go down, and the question is how quickly it goes down. As I indicated, it can be a blow-up or it can be a soft landing. We have every incentive for it to be a softer landing. At the end of the day, the value of the Canadian dollar will be tied to the U.S. dollar, but I do not think there is any magic formula there. We want to ensure that the U.S. and China manage that credit-debtor relationship in a way that it does not blow up in our faces — and it is not only our faces; it is collective faces.

Senator Grafstein: On this point, then, do you think it is valuable for us to call evidence from the IMF and other monetary experts to take us through this issue? This is complicated water.

Mr. Hampson: Absolutely, and you might start with the Governor of the Bank of Canada, if he has not already appeared.

The Chair: That is a good thought.

What role does the WTO play in addressing this issue?

Mr. Hampson: It plays a huge role through its trade dispute mechanisms and through its monitoring mechanisms. The real challenge is to convince China, which joined the WTO in 2001, to start playing by the rules. Independently, we do not have the leverage to do that, but we work with others to secure that leverage. As I said earlier, there are mutual vulnerabilities on both sides of the Pacific that create sources of leverage to work on these problems.

Senator Andreychuk: Everyone else has made statements, so I add mine to the success of the Norman Paterson School of International Affairs and your work.

At point 5 in your paper, you say that "Engagement with China, India and Russia should be on our terms, with policies that are calibrated to our own interests." You then say, in point 6, that we have been on a roller coaster. Sometimes the issue is human rights, sometimes it is trade, and sometimes it is something else.

Do I understand you correctly that your message is consistency, and that we have not been consistent in our foreign policy? If I understand correctly, it is in two parts. One is that we emphasize one part of our foreign policy at one time or another. Sometimes we are on the trade issue and sometimes we are on the human rights issue. If we put together the parts as a foreign policy and stick to it consistently, we would be better off, if I understand you correctly.

I ask that question because you also say that we should apply this foreign policy on our terms, yet your answers to Senator Grafstein and others suggest that we play in the international, multilateral arena, and that we cannot do it on our own terms. Am I reading you correctly on those points?

Mr. Hampson: Thank you, senator, for pointing out what may be seen as potential inconsistencies in the presentation. My point about our terms is directed to domestic investment regimes, particularly as they pertain to foreign direct investment in our resource sector.

Regarding multilateral institutions, we sometimes subscribe to the myth that we do it for idealistic reasons. Our participation in those institutions should be driven by an acute sense of our own national interest.

We should look at global currency reform so that we are less dependent on the U.S. dollar. We manage that transition away from the U.S. dollar in a way that does not end up harming everyone's interests, including our own. We need to work with others and we are. We are supporters of the reform of the International Monetary Fund and the Bretton Woods system. It will be a tough slog. It is becoming tougher, particularly as we come out of the crisis.

The crisis created a strong sense of collective action. The major economies of the world felt that they were about to be hung in a fortnight. They had to work together. That sense is dissipating as we move out of the crisis. The direction in which we have to move is clear.

You are right when it comes to looking at the relationship in totality beyond trade and investment relationships. We need stability in our relationships with all three countries. We have blown hot and cold. Sometimes relationships are driven by domestic politics. Sometimes they are driven by events taking place in those countries, such as the actions of government, which can create huge problems frankly. Sometimes we get carried away as well.

I tried to suggest that we cannot be like Goldilocks. We must get foreign policy right and we must stick with it. We must also bring stability and maturity to those relationships.

Senator Andreychuk: Geographically, I think one success of Australia moving toward China and Asia is that Australia clearly defines its interest to be within the region. Australia closed missions and opportunities elsewhere to put its effort into Asia about 20 years ago. It is now paying off somewhat, although the road is a bumpy one.

Canada put its emphasis on the United States. Each change of government seems to reinforce that emphasis. Then we question if the emphasis should be South America, Europe or China. Where do you think our emphasis should be beyond the United States? Do we develop our expertise and rules, and then let business find its partners around the world?

Mr. Hampson: You are right, senator. Business ultimately will find its partners. Governments can play a facilitating role, but they do not pick partners at the end of the day.

Having said that, historically, Canada has tended to think in terms of the world as regions, with a region-of-the-month club. Sometimes the region is Latin America; sometimes it is Europe; and sometimes it is Asia-Pacific. Look at any government, whether Liberal or Conservative. They start by rediscovering the Americas. Then, they realize that perhaps there are limited opportunities in the Americas and they had better start looking elsewhere.

At the end of the day, it comes down to what countries matter to us, regardless of region. How do they matter to us economically, politically and from a security standpoint? It is a mistake to wed ourselves to one region for precisely the reasons reflected in some of the figures I gave you.

Trade with China is now number three after the European Union. It is bigger than Japan. It will grow; that is also true of investment. This figure argues, simply, that China is important to us. The same is true of India. The point was made earlier about the huge diaspora communities in Canada. Some are for the better and some are for the worse.

However, that is the reality. We have to live with it. They define relations and also create constraints in the way we manage relations. Ultimately, that is the challenge of statesmanship. The challenge of foreign policy is to bring stability to those relationships. These countries matter to us. I think your committee has it right to be looking at these three countries.

Senator Mahovlich: You mentioned that there were 200,000 Canadians in Hong Kong. How many Canadians are in China?

Mr. Hampson: Hong Kong is part of China now. A recent study has been done by the Asia Pacific Foundation that looks at this question in some detail globally. I refer the committee to the study. The largest number is definitely in Hong Kong. I cannot give you a figure for China. I dare say it is in that study.

Senator Mahovlich: Then that is what we will do.

You say that we will peg our currency to the U.S. currency. When do you think this will happen? Will it be when the Canadian dollars reaches $1.50 or when it reaches $1 even?

Mr. Hampson: The Bank of Canada manages the value of the dollar in relationship to the U.S. dollar.

Senator Mahovlich: In 1970, I think the Canadian dollar was at $1.10 U.S.

Mr. Hampson: That is correct. For a time, Canadians liked the fact that it was $1.10. Shortly after that period, we moved to a monitored floating system when the U.S. suspended the convertibility of the dollar. I see Senator Grafstein nodding his head in agreement. We have always tried to keep our dollar well below the U.S. dollar to enhance our competitiveness. That has been the policy in recent years.

Senator Mahovlich: We try to keep it below the American dollar?

Mr. Hampson: It is a monitored float. There is no question about it.

Senator Mahovlich: From what country does China receive most of its oil and other energy?

Mr. Hampson: Much of its energy comes from the Middle East and Iran. There are huge Chinese investments in Russia. Russia is an important supplier. China has been making important investments in Africa.

China is a global player. There are also Chinese sources of offshore oil as well.

Senator Mahovlich: China produces more coal than anything else.

Mr. Hampson: Yes, absolutely.

The Chair: Dr. Hampson, you have painted a bit of a picture of the world's greatest mercantile state aided by, or playing with, the rules of the 17th and 18th centuries — those are my words, not yours — supported by a state that will do whatever is necessary to support its merchants. I do not suggest that, as in the old days, they will send warships and blow things up. You have also suggested that they do not play by normal rules and that the world should be careful when it engages China. Yet we must engage China because today we live in a world where we are a small village.

How do we deal with that situation? With respect to the comments you made before, obviously, WTO is one of the areas, but how does the world deal with that situation? How does a little economy like Canada, although one of the strongest in the world, protect itself from that situation?

Mr. Hampson: In my reading of the debates taking place among Americans who are either of an academic persuasion or a public policy persuasion, or some combination of the two, I have been struck by a great deal of ambivalence and apprehension. I suppose we can say that, at one extreme, there are those who say there is no problem; at the end of the day, China will embrace the neoliberal economic order, and it will also eventually embrace some form of democracy.

Others who are Cassandras say, do not look only at the Chinese economy but also at where military expenditure is going; it is rapidly increasing. Look at how China is beginning to flex some of that military muscle. I am not expressing my opinion here but that of others. For example, a new book by Aaron Friedberg of Princeton University makes precisely that argument; namely, with respect to security terms, watch out.

I suppose I am being Canadian here, but my own view is that the truth lies somewhere in between. We can point to all kinds of examples where China is doing its best to be a cooperative partner. There is perhaps no better illustration of that cooperation than the constructive role China is now playing with respect to North Korea. China has also moved its relationship with Taiwan in a more constructive direction, and part of that movement has been driven by Taiwan's own leadership as well.

The Chinese do not like to be seen to be out of line with the rest of the international community. We have seen some of that reluctance in Sudan. However, we must also recognize that Chinese politics, interests and foreign policy are driven by its own sense of national interest and by what is clearly a complex domestic environment that is creating all kinds of new pressures on China's leadership.

My advice is not to be starry-eyed when it comes to looking for opportunities with China, but, at the same time, not to shun that relationship. We have moved in that direction in the past, but it has not been especially constructive. The challenge continues to be finding the right balance. We are beginning to find the right balance. However, as that relationship deepens and Chinese influence in our economy grows, there is a double challenge. One is to ensure, particularly, when it comes to foreign direct investment, that they play by our rules and not theirs; second, that we work with others to promote the further liberalization of what continues to be a mercantilist-driven economy if we look at it in general terms.

The Chair: Have you seen any improvement in the last three, five or ten years in China's attitude towards playing by international rules, for example, by accepting standards that have now been established by the international community and all the multilateral organizations?

Mr. Hampson: I do not think they would have been able to secure membership in the WTO had they not begun to move in the direction of playing by our rules. They still have a long way to go in terms of liberalizing their markets.

Again, it is interesting. I quoted in my text a recent article from The Economist that suggests that in high value goods the market is fairly open. For example, if we are talking about aerospace, North American and European companies are able to do good business with China. At the low-value end, for example, recycling, it is the same thing. It is in the middle where there is a big challenge in the areas that I identified, such as telecommunications and so forth. Again, it is a matter of keeping at it by working with them, not shunning them, and having patience.

The sovereign wealth fund is a big challenge. China has Africa on side because China is one of the biggest investors. Thank God someone is investing in Africa. However, there are also unattractive aspects, and the Chinese are experiencing push-back from the Africans. Some of their nationals have had unpleasant things happen to them because of the backlash in some African countries.

Engagement is important, but it also requires tough love and push-back.

Senator Downe: In point six of the paper you presented this evening, you refer to the roller coaster we have been on with these countries over the last number of years, and how something seems to flare up to put us off track. The items that have flared up are significant. Given the need for stability in China, I suspect that if there is another pro- democracy demonstration that becomes out of control that the government is opposed to, it will take the same action, and we can assume we will take the same action and it will cool relationships, as it would with India or Russia in the example you used. If those incidents are repeated in different countries and the experience is similar, our reaction will be the same.

Where does that leave us for long-term investment? I compare that situation, for example, to trade and diplomatic relationships with the United States, the U.K., France or Germany, where we do not have similar reactions because those countries do not behave that way because of the political-military involvement.

Mr. Hampson: Hypothetically speaking, senator, if there was another Tiananmen Square episode, it would clearly throw China's relations wildly off course not only with us but also with the rest of the world. There is evidence of a growing liberalization within China. At the same time, China has huge and growing problems with some of its ethnic minorities, not only with Tibet. We have seen evidence of those problems in the form of demonstrations in some of the western provinces of China. It is hard to predict where those problems will go.

I meant to suggest that at times, we create our own problems; they are of our own making. I lumped these three countries together but I will refer to one of the other countries now. We have not talked much about India. In the case of India, we could do well to follow the American lead on the nuclear issue.

In 1974, India detonated a nuclear device using a Canadian research reactor that we sold to them in 1955. However, it is important to remember that India was not initially a member, which was pointed out to me by former Ambassador William Barton, whom some off you may know. I saw him a few days ago and he reminded me that India was never a partner to Atoms for Peace back in the 1950s. We have to recognize that the horse bolted the stable a long time ago. India is a nuclear power; and we have to recognize that fact. We cannot turn back the clock. There are other compelling reasons to engage and move that relationship to a stable footing and not make it hostage to a disarmament policy that does not recognize reality for what it is.

Senator Downe: It is my understanding, not to belabour the point, that the technology sold to India in 1955 was with the understanding that it would not be used for this purpose. It was on that basis that Canada took the decision years later when they then used it. If something similar were to happen today, the Canadian response would be identical.

Turning to China for a moment, Senator Grafstein indicated the work by the Paterson School on Canada and the U.S. I am familiar with some of the work and find it to be extremely high quality. The phrase that is popular at the moment with the United States is: Security trumps trade. Can it also be argued, given the host of problems in China, the large peasant class, the control of the military and the political establishment, that stability trumps trade in China? For that reason, if threatened with instability, China will act in a certain way and other countries, such as Canada, will act in a certain way, bringing us back to where we were a decade ago vis-à-vis trade.

The question is: How stable can trade relations be in the long term when dealing with these political institutions?

Mr. Hampson: That is a good and fair question. It might well be that events beyond our control will blow a relationship out of the water, putting it crudely. It has happened before and it can happen again. At the same time, there are legacy problems or issues that have continued to define relationships but which should not constrain relationships to the same degree.

On the matter of human rights, I subscribe to the view that it is better to engage; it is better to continue to talk about those issues to promote internal reform. However, one must recognize that, ultimately, political transformations in authoritarian regimes will come from within. They will not be precipitated from the outside.

Senator Downe: Mr. Hampson, at point 5 in your presentation, you talk about the Australian experience. I do not know how much work you have done in that area, but privately-held Australian companies, with shareholders, would be interested in maximizing the return for their investors, whereas state-controlled companies have national objectives. I assume that the price is lower for companies in Australia because of this rule on limits on ownership than it is for similar companies in Canada. Is that a problem in Australia?

Mr. Hampson: I am not sure I entirely understand your question. The Australian legislation regarding ownership levels of foreign investment has been directed at Chinese investment to prevent the wholesale takeover of Australian companies in the natural resource sector. When commodity prices were tanking, these companies were as, shall we say, potential victims for foreign takeover.

Some members of the business community in Australia who were hoping to sell their companies or to increase foreign ownership above those levels have not been happy with the legislation. There are examples. It has been driven by the recognition that when a state-owned company backed by Chinese sovereign wealth, if I may put it in those terms, takes over a company, there are all kinds of things that the state-owned company can do once it owns the company in terms of transfer pricing that make it difficult for Australian legislative authority to know what is happening. Depending on the level and concentration of ownership in an industry, we begin to see not only oligopolistic practices but also oligopolistic practices supported by a legal and political regime over which we have absolutely no control and there is no transparency.

Senator Grafstein: I have a brief question. I am not sure if I should laugh or cry about this situation. As a historical observer, do you find it ironic that Alberta, who fought so bitterly against the National Energy Program in the 1970s, and Petro-Canada now welcome Petro-China, which is a state-owned corporation, to acquire 60 per cent of the Athabasca Oil Sands MacKay River and Dover projects? Alberta opposed the NEP and Petro-Canada investing in Alberta for many different reasons. Yet, here we are 25 years later, and Alberta welcome Petro-China into the province with open arms at 60 per cent, which Petro-Canada never sought to achieve in many of these projects. Do you find that situation ironic from a historical perspective?

Mr. Hampson: There are many ironies in history of which this may be simply one.

Senator Grafstein: I was on the Petro-Canada board, so we share the irony.

The Chair: Mr. Hampson, thank you for sharing your thoughts with us. From the comments around the table, it is obvious that there is a great deal of respect not only for you but also for the institution that you represent and the great work that you do. I am sure we will see you again in the near future.

(The committee adjourned.)